Make your money work for you!

credit groups

Though I’m currently enjoying a lovely 34 degrees and sunshine in Valencia, then not all is sunshine and rainbows in my Bondora portfolio. Firstly, the influx of defaulted loans is steady and secondly, since I’ve slowly reduced money invested monthly as well, then actual numbers of interest earned have also dropped.

As you can see, this month ended with red + yellow loans actually totalling over 25% of current portfolio value. One of the reasons for this is that I’m now seeing the influx of defaults from the second half of last year when I added in increasing amounts of funds. This will likely look even sadder in the next few months when I reduce the money invested further. Not that I’m looking forward to the moment when 20% of the pie will be defaulted loans but that is not completely out of the realm of potential options.

Interest earned

As stated, there was an actually almost 3 euro drop in interest earned, mostly due to more loans defaulting. The final total for the month of June ended up just below 100€ (99,16€), which is a bit sad since I hoped that I was over the 100€ hump for good. I’m hoping July will perform better, but so far there hasn’t been a particular influx of payments like there is at times in summer. Also, the recovery of defaulted loans wasn’t particularly great this month either, the total recovered was barely over 5€.

Compared to May I actually ended up with so many new defaults it was a bit surprising, 15 more stage 1 loans was a bit more than expected in comparison to the recovery. It’s still a very long time horizon plan to see anything from recovery but it’s clear how this is demotivating to see – the default rate of loans in my portfolio is getting quite high despite the fact that I’ve heavily steered towards lower risk grade loans in the past few months.

Looking at the overall investments, as stated, I’ve reduced the amount I invest in Bondora per month to about 100-120€ or so, depending on how much free funds I have. This slows me down in terms of my goal for Bondora portfolio size for the year 2015, but across all social lending platforms I’m on track for 10 000€ principal value, since while Moneyzen is doing slow, then I’ve added Estateguru into my portfolio as well. Time will tell how the second half of the year will play out.

The new Bondora rating system has been live for almost four months now, and it’s time to see how my portfolio has changed. I set out to slowly start to lower the risk of my portfolio for two reasons. Firstly, because the lack of the country filter means that allowing in all risk groups in my opinion isn’t reasonable and secondly since my portfolio is getting bigger, then I’d like to make the portfolio a bit more stable as well.

At the end of November this is what my portfolio looked like:

Even though by the old logic 50% of my portfolio consisted of “good” A1000 credit group loans, once the new ratings were added, the picture completely changed. This is why I decided to try to slowly reduce the amount of risky loans, only adding them on manually and allowing the new portfolio bidder to invest into AA, A, B & C loans. The results have actually been less dramatic than you’d expect.

Now, the question is, why are the changes so small? Four months should be a reasonably long time. The answer consists of many components in this case.

1.) There are very little AA and A loans, and my portfolio had more than the marker average for both. This means there just aren’t all that many loans for me to add into those categories even if I want to (I have 1,2% of AA loans while the historical average is 0,3% and I have 6% of A loans while the historical average is 2,5%)

2.) Since E,F&HR credit groups include a lot of my defaulted loans (440€, about 70% of my defaults), the principal amount of those groups is slow to change, because loans in other groups are getting paid back and reinvested, while there is a lot of locked in principal in those groups.

3.) Since my portfolio is at just about 5500€ currently, then to meaningfully change the balance of different credit groups take quite a lot of money to see the impact. At the rate I’m going I’ll get the HR rate to drop to about 12% and about 4% for E&F by the end of the year since I haven’t completely stopped investing into those groups.

This demonstrates very clearly why it’s important to have a long term strategy for your portfolio. If you just wish to change things quickly, then it won’t really work in social lending. The 600 or so loan pieces that I had before I started to slowly lower risk levels will impact my portfolio for a very long time, and to completely overhaul my portfolio I’d have to sell a lot of loans (which I don’t want to do).